Niti Partners & Associates has published Permanent Establishment in Nepal, a legal handbook explaining when and how a foreign company becomes taxable in Nepal through a permanent establishment (PE).
It examines the Income Tax Act, 2002 (the Act) and the Permanent Establishment Directive, 2021, covering fixed-place, service, agency and construction PEs, applicable time thresholds, tax treaty provisions, registration requirements and taxation of PE profits.
The handbook is authored by Sameep Khanal, Managing Partner of Niti Partners & Associates and a leading tax lawyer and tax litigator in Nepal, and Punya Prasad Khanal, the firm's Chairman and a senior litigator with more than 35 years of experience in civil and commercial disputes.
Sameep advises foreign businesses, international contractors and investors on Nepalese taxation, corporate law and regulatory requirements. His experience includes advising construction companies and foreign businesses on whether their contractual arrangements, personnel and project activities trigger permanent establishment obligations, as well as representing clients in tax disputes and revenue-related proceedings.
Punya brings more than 35 years of litigation experience, including appearances before the Supreme Court, High Courts, the Debt Recovery Tribunal and other courts and tribunals in Nepal. His experience in commercial, banking and civil disputes complements the handbook's analysis of the legal and commercial implications of permanent establishment.
The handbook is intended for foreign companies, international contractors, investors, in-house counsel, finance professionals and tax advisers. It provides an English explanation of the IRD's Permanent Establishment Directive, originally issued in Nepali, including its worked examples.
What is a permanent establishment in Nepal?
A permanent establishment in Nepal is a place or arrangement through which a non-resident person carries on business in Nepal, wholly or partly. It may arise through a fixed place of business, a dependent agent, the provision of services or a construction, installation or assembly project.
A foreign company does not necessarily need to incorporate a subsidiary or register a branch office for a PE to arise. The determining factor is whether its actual business activities and arrangements satisfy the statutory conditions under Nepalese tax law.
Under the Income Tax Act, a PE is treated as a separate taxable entity for determining the income attributable to its business in Nepal. It must comply with applicable tax registration, filing and payment obligations.
How many days create a permanent establishment in Nepal?
The applicable period depends on the type of PE. Fixed-place and agency PEs do not generally require a minimum duration, whereas service and construction PEs are subject to specific time thresholds.
| Type of PE | What creates it | Domestic time threshold |
|---|---|---|
| Fixed-place PE | A place of business, including principal equipment or machinery | No minimum period |
| Agency PE | A dependent agent carrying on the foreign enterprise's business | No minimum period |
| Service PE | Technical, professional or consultancy services in Nepal | More than 90 days in any 12-month period |
| Construction PE | Construction, installation or assembly project, including supervision | 90 days or more |
The calculation requires consideration of the nature of the activities, related contracts, personnel presence and applicable double taxation agreements.
What is a service PE in Nepal?
A service PE arises when a non-resident provides technical, professional or consultancy services in Nepal for more than 90 days in any 12-month period. The period may consist of one continuous engagement or multiple visits and service periods.
The calculation is not necessarily limited to the days spent by one individual. The Directive addresses the aggregation of personnel days and the treatment of subcontracted services. Foreign service providers should therefore assess the combined duration of their activities and the involvement of personnel and subcontractors.
This is particularly relevant to engineering consultants, technical service providers, project management companies, foreign contractors and businesses providing consultancy services to Nepalese clients.
What is an agency PE in Nepal?
An agency PE may arise when a dependent agent in Nepal acts on behalf of a foreign enterprise and performs activities satisfying the statutory conditions.
The assessment goes beyond the formal description of the commercial relationship. Contractual authority, the agent's actual functions and its degree of independence may all be relevant.
For example, a person who habitually concludes contracts on behalf of a foreign enterprise may create an agency PE. The treatment of distributors and intermediaries also requires examination of the actual commercial arrangements rather than reliance solely on the description in a distribution agreement.
Foreign businesses appointing local representatives, distributors or commission agents should assess the PE implications before entering into these arrangements.
What is a construction PE in Nepal?
A construction PE may arise where a person carries on a construction, installation or assembly project in Nepal for 90 days or more, including supervision of such a project.
This threshold is particularly important for foreign contractors participating in infrastructure, hydropower, industrial construction and engineering projects in Nepal.
The duration of related contracts and subcontracted activities may need to be considered when determining whether the statutory threshold has been crossed. Dividing a project into separate contractual arrangements does not necessarily prevent aggregation of relevant periods.
Foreign contractors should assess PE exposure before mobilising personnel, equipment and subcontractors, taking account of tax registration, project documentation and other regulatory requirements.
Do tax treaties change the 90-day PE rule in Nepal?
Yes. Where a foreign enterprise is resident in a country that has a double taxation agreement (DTA) with Nepal, the applicable treaty provisions must be considered alongside domestic law.
The treaties addressed in the Permanent Establishment Directive generally provide different duration thresholds for construction and service activities, including 183-day or six-month tests, depending on the treaty and nature of the activities.
The threshold is not uniform across all treaty partners. For example, the Nepal-Sri Lanka treaty retains a 90-day construction-site threshold.
A foreign company should identify its country of tax residence and examine the relevant treaty before determining whether its activities create a PE in Nepal. The domestic 90-day threshold should not automatically be applied where an applicable treaty provides a different test.
How is a permanent establishment registered in Nepal?
A foreign enterprise establishing a taxable presence in Nepal must obtain a Permanent Account Number (PAN) from the Inland Revenue Department (IRD) and comply with applicable tax registration and filing requirements.
The supporting documents depend on the nature of the PE. The Permanent Establishment Directive identifies different forms of evidence:
- Fixed-place PE: Evidence of the place of business or relevant business registration documentation.
- Agency PE: The agency agreement and supporting documents establishing the relationship and activities of the agent.
- Service PE: The relevant service contract or client's request letter and supporting documentation.
- Construction PE: The signed construction, installation or assembly contract and relevant project documentation.
Failure to obtain PAN registration does not prevent the IRD from determining that a PE has arisen or eliminate the resulting tax liability.
Foreign enterprises should assess registration requirements before commencing activities that may create a taxable presence.
How much tax does a permanent establishment pay in Nepal?
The tax liability of a PE depends on its taxable income attributable to business activities in Nepal, the applicable corporate tax rate and relevant withholding or repatriation tax obligations.
The Permanent Establishment Directive provides worked examples illustrating the taxation of PE profits. At the 25% corporate tax rate used in its example, a PE earning Rs. 100 in taxable profit pays Rs. 25 in corporate income tax, leaving Rs. 75.
If the remaining profit is subsequently remitted abroad, the example applies a further 5% tax on the remitted amount, equivalent to Rs. 3.75. The combined tax in that example is Rs. 28.75.
The Directive also addresses the deductibility of head-office expenses, including interest, royalties and management fees. Such charges cannot simply be treated as deductible expenses on the same basis as payments to independent third parties.
A PE must maintain separate books and records in Nepal in accordance with applicable requirements, including the prescribed five-year record-retention period.
What law governs permanent establishments in Nepal?
The principal legal instruments governing permanent establishments in Nepal are:
- Income Tax Act, 2002: Section 2 contains the relevant definition of a PE, while section 68 provides for the taxation of a non-resident person's PE.
- Income Tax Rules, 2002: Rule 23A addresses the suspension of a PAN in the relevant circumstances.
- Permanent Establishment Directive, 2021: Issued by the IRD, the Directive explains the application of the PE provisions and provides practical examples.
- Double taxation agreements: Where applicable, treaty provisions must be considered when determining the existence and tax treatment of a PE.
The Directive must be read consistently with the Act and cannot override the parent legislation. Where a double taxation agreement applies, its provisions must also be considered in determining the applicable treaty treatment.
About the Permanent Establishment in Nepal handbook
The Permanent Establishment in Nepal handbook is a legal publication of Niti Partners & Associates for foreign companies, contractors, investors, tax professionals and legal counsel dealing with cross-border business activities in Nepal.
It examines the statutory PE framework, the IRD's interpretation, applicable time thresholds, treaty provisions, registration requirements and taxation of PE profits. It distinguishes between statutory provisions and administrative guidance, identifies the firm's own analysis and highlights matters requiring further verification.
The English explanations of the Directive are the firm's own translations and are not an official English version issued by the IRD. Readers should verify applicable rates, treaty provisions and legal requirements against the law in force at the time of their transactions.
Frequently asked questions
Tax and regulatory compliance support in Nepal
Permanent establishment issues can extend beyond income tax. Foreign enterprises and contractors may also need to address tax registration, withholding obligations and other regulatory requirements arising from their activities in Nepal.
Niti Partners & Associates advises foreign and domestic businesses on taxation, tax compliance, tax disputes and revenue litigation. Learn more about our taxation practice in Nepal.
For broader corporate and regulatory obligations, including company law and statutory compliance, explore our company compliance practice in Nepal.